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Euro, sterling buoyant before central bank meetings

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[May 08, 2014] By Marc Jones

LONDON (Reuters)  Expectations the European Central Bank will keep its policy powder dry for another month kept the euro near a two-month high on Thursday, as soothing talk from the Federal Reserve and data from China lifted shares.

The ECB meets in Brussels later. Although euro zone inflation remains well below its comfort zone, signs the economy is picking up and still-falling government borrowing costs mean the bank is likely to hold off cutting interest rates again.

The euro climbed 0.25 percent to $1.3920 in early European trading, hovering near the two-month peak of $1.3952 it reached earlier in the week.

Traders said it could quickly fall back towards support just under $1.3800 in the event of any policy surprises, though any doubts the ECB was preparing for some form of easing in the coming months could send it upwards again.

"The market is not expecting any policy action today and our view is if there is going to be any policy easing it will be in June when they will have new economic forecasts," Bank of Tokyo Mitsubishi foreign exchange strategist Lee Hardman said.

"If (ECB President) Mario Draghi doesn't escalate the concern over the strength of the euro at the press conference then the euro will rise, probably above $1.40."
 


Share and bond markets were also on the front foot, boosted by supportive comments from U.S. Federal Reserve chief Janet Yellen on Wednesday and signs that Russia is trying to head off a full-blown conflict in Ukraine.

Upbeat Chinese trade data overnight meanwhile provided some signs of stabilization in the world's second-largest economy.

As midday approached, the FTSEurofirst 300 <.FTEU3> index of top European shares was up 0.6 percent at 1,350.98 points, as the FTSE in London <.FTSE>, the CAC 40 in Paris <.FCHI> and Frankfurt's Dax <.GDAXI> gained 0.4-0.6 percent.

Russian stocks <.IRTS><.MCX> continued their recent rally, hitting a two-month high as the rouble took a breather having touched a 2-1/2 month high against the dollar. <EMRG/FRX>

FED QUARTET

The ECB's rate decision is due at 1145 GMT, with Mario Draghi's news conference at 1230 GMT.

Any lingering hopes of an easing move by the ECB may have been snuffed out by German Finance Minister Wolfgang Schaeuble, who said central banks needed now to pare back their money printing to avoid inflating fresh asset bubbles.

Wall Street futures pointed to a near flat start in New York later. Earlier in Asia, Tokyo's Nikkei share average <.N225> had ended up 0.9 percent, while MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> rose 0.5 percent to climb away from five-week low.

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China's exports and imports returned to slight growth in April after a surprise fall last month, offering signs that Beijing's use of targeted policy measures to underpin growth may be starting to stabilize the economy.

Mainland Chinese shares <.CSI300> rose 0.8 percent, also helped by bets on further stimulus measures after the central bank warned of a deepening economic slowdown.

Sentiment had already been buoyed after comments on the "considerable slack" in the U.S. labor market from Yellen had bolstered the view the Fed would continue to stay in supportive mode for plenty of time yet.

She, along with a quartet of fellow Fed policymakers, will speak later in the day in the United States.

Yellen's remarks also kept the 10-year U.S. Treasury yield near Monday's three-month low of 2.572 percent, though it had edged up slightly to 2.6287 percent by 1015 GMT, dragging German Bunds with them to 1.482 percent. <GVD/EUR>

The pound held near a five-year high against the dollar on rising expectations the Bank of England, which was also meeting, will tighten policy before the Fed, probably early next year. It last stood at $1.6963 versus Tuesday's high of $1.6997.

The Australian dollar climbed 0.6 percent to $0.9382 after local data showed that employment had risen more than expected in April.

With risk sentiment improving slightly, the yen stepped back from a three-week high to 101.77 yen on the dollar while gold and oil sagged to $1,290.30 per ounce and $107.69 a barrel respectively.

(Editing by Catherine Evans)

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